A reduction in interest rates is usually good news for
However, the Bank of England’s decision to take
another half point off its base rates to leave them at a nominal one per cent
is at best pointless and at worst counter-productive.
Everyone agrees that the currsent crisis is a crisis of
confidence – but cutting rates so drastically is a symptom of lack of
It looks like a panic decision.
It is the mirror image of John Major’s excessive increases
in interest rates on “Black Wednesday”, 1992, which, far from calming the
markets, convinced them that Britain’s position in the ERM was unsustainable.
A one per cent interest rate is equally unsustainable. If
banks are to get out of intensive care, they need to become less dependent on
injections of public money and return to reliance on savers depositing with
That is not going to happen with interest rates at such
Of course, this would be no bad thing if it encouraged those
with surplus cash to invest it directly in business rather than putting it in
banks. In theory, low interest rates from the banks should increase equity
investment in business, but in practice there is little confidence in business
– partly because on the credit squeeze imposed by the banks.
Since the credit squeeze is due to lack of supply – not lack
of demand – higher interest rates would actually encourage deposits and
therefore, for once, increase lending.